Companies, citizens and SKAT (The Danish Customs and Tax Administration) cannot find their way around the mishmash of rules and taxes

The Danish rules for taxation of capital gains are amongst the most complicated in the world. A brief, but more or less complete, presentation of the rules would fill approximately 30 A4 pages.

Investors have to come to grips with their, often complex, investments in advance, but at the same time, Danish investors need to know and understand the taxation rules attached to said investments. Plus, taxation rules often have a crucial significance for determining whether an investment is actually interesting. So, investors are often left in the dark about taxation rules. And in the worst case, it can end with a 42 pct. taxation on unrealised profits.

The Danish rules on capital gains taxation have developed over several years and show a patchwork of political and administrative changes, often because a “tax hole” that has arisen due to individual cases needs closing. It is important to prevent obvious exploitation of tax rules, but this has had the unfortunate effect that the rules are becoming more complex over time.

A few examples of our complex system can be mentioned here: there are different rules for taxation of shares, trust share certificates, bonds and financial contracts. There are also different rates for the same investment. Losses and gains are treated differently and offsetting losses within gains is a jungle.

All in all, this means that we have a set of rules that are so thorough that SKAT, companies and citizens have serious problems finding their way around them. It is a fact that SKAT uses by far the main part of its control resources on individual persons in order to correct errors in individual’s profit statements. At the same time, investors, who dare to throw themselves into the legal jungle, use a lot of time and financial resources on advisors, who complete the same exercise.

It is pointless that investors and SKAT spend an eternity interpreting legislation and filing cases in the administrative and judicial system. In addition, there is the fact that the complicated tax system provides arbitrary differential treatment of different kinds of savings.

The rules cost prosperity

More simplicity in legislation relieves companies and authorities of administrative burdens and frees up expensive resources at SKAT that can be used against people who consciously try to cheat the system. It is well-known from international studies that the most important factors for attracting investment in terms of taxation are stable and simple rules. That is ahead of low tax rates. The extremely complex Danish rules are creating strains that can easily lead to capital being moved to other countries.

Numerous Danish analyses problematize capital tax in Denmark e.g. the Danish Productivity Commission’s report from 2014 and most recently, Peter Loft, former Head of Department at the Danish Ministry of Taxation, has spoken out for 19 years about the Danish tax system being unreasonably confusing and the fact that it leads to tendencies that are in socio-economic terms undesirable and come at the cost of Denmark’s prosperity.

Simplifications are advantageous

In the lead up to the upcoming tax policy negotiations, where there is limited manoeuvre room for tax relief, it is appropriate to evaluate the advantages that can be gained for the Danish economy by simplifying regulations.

This is also emphasised by a commission for the business taxation committee from November 2015, where it is evident that the committee will present a proposal for a more neutral and symmetrical taxation of investments and business owners.

A clear start on simplifying the tax system is to tax shares and capital gains as one type of income. This will lead to more symmetry in taxation and thereby contribute to capital being lead to where the socio-economic return on investment is largest. This was also one of the central conclusions in the Danish Productivity Commission’s report from 2014.

In addition, the report suggests that progression in taxing positive capital gains is abolished. Progression is harmful for growth, because in combination with e.g. tax exemptions for gains on residential properties, it encourages people with positive net worth to invest in residential property rather than commercial companies that promote growth. The Danish Productivity Commission’s report from 2014 also comes to this conclusion.

Finally, further simplification and symmetry in the Danish taxation system can be achieved by providing the option of deducting losses across shares, trust share certificates and bonds.

Today, private investors are in a situation, where taxation of pension savings and return on real estate is significantly lower than taxation of equity income and capital gains. This is not conductive for strengthening the stock market culture and the supply of venture capital in Denmark. It is time to simplify capital gains taxation both for the sake of investors and Danish society.